Comcast Revs Up Capex

Despite racking up another record-setting quarter and year of cable subscriber growth, Comcast Corp. (Nasdaq: CMCSA, CMCSK) sent a chill up Wall Street's spine this morning by vowing to boost capital spending markedly this year.

In reporting fourth-quarter earnings today, North America's largest MSO said it plans to spend a record $5.7 billion on cable plant upgrades and new service launches in 2007. That's up 24 percent from $4.6 billion in cable capex last year and up more than 40 percent from $4 billion in 2005.

The news stunned analysts, who had been expecting Comcast to spend $4.5 billion on capex this year. In a report today, analyst Craig Moffett of Sanford C. Bernstein & Co. Inc. noted the spending will cut into the MSO's free cashflow growth, keeping it flat despite higher revenues and income. He called the development "a clear disappointment."

But the news will likely cheer cable equipment suppliers. Jason Ader, analyst at Thomas Weisel Partners , argued in a research note today that such vendors as Arris Group Inc. (Nasdaq: ARRS) and Harmonic Inc. (Nasdaq: HLIT)
stand to reap the benefits from Comcast's planned splurge. He sees boosts for Arris's CMTS and E-MTA businesses, as well as Harmonic's digital video encoder and VOD gateway products.

Of the projected $5.7 billion, Comcast officials said they will spend about 75 percent, or more than $4.2 billion, on rolling out new equipment for new products and services including VOIP, faster cable modems, high-definition TV (HDTV), video-on-demand (VOD), and commercial services. The rest goes to plant upgrades and to bandwidth expansion technologies including switched digital video, digital simulcasts, and fiber node splits.

Included in the capex pile are $120 million to $180 million to upgrade the recently acquired Adelphia Communications cable systems, and a $250 million investment to rolling out a new commercial VOIP product.

"We think we can capture market share now, and this is the time to extend our lead in the market," Comcast chairman and CEO Brian Roberts told analysts in the company's earnings call this morning. "We're going to invest capital to drive that growth."

Comcast executives trotted out colorful charts to buttress their case for the unexpected spending surge, showing 75 percent of that spending will be "variable and revenue-driven." The charts also show that the capital cost of each new revenue generating unit (RGU) will continue to fall, to $814 this year from $1,300 in 2005.

"We get great returns on this investment," said John Alchin, an outgoing (not to say flamboyant) CFO of Comcast. "We are seeing accelerated RGU additions supported by a capital investment with great returns, and our capex per new addition is projected to decline approximately 40 percent over a two-year period."

Comcast, which also plans to spend $250 million this year building its new corporate headquarters in downtown Philadelphia, unveiled the unsettling capital spending projections while trumpeting its latest gains in subscribers, revenues, and profits. The MSO set new quarterly growth records again as it continued to bask in the glow of its new VOIP product and triple-play bundle.

Topping off what its officials termed the company's "best year" ever, Comcast netted more than 1.6 million RGUs in the fall quarter. The gains include almost 1.5 million units in "historical" Comcast systems and another 150,000 in systems acquired from Adelphia and Time Warner Cable Inc. (NYSE: TWC)

The MSO's VOIP offering, known as "Comcast Digital Voice" (CDV), clearly led the way once more. Comcast signed up an industry-high 508,000 IP phone customers in the quarter, which translates to a rate of nearly 40,000 a week, to wind up the year with more than 1.5 million new phone subscribers.

As a result, Comcast closed out 2006 with a total of 1.855 million VOIP subscribers, only about 5,000 below cable industry leader Time Warner Cable. In their earnings call today, Comcast executives noted that the company has since cleared the 2 million customer mark, presumably moving it ahead of Time Warner.

Besides the record VOIP subscriber gains, Comcast also added 488,000 cable modem and a record 613,000 digital cable subscribers in the fourth quarter. In addition, it netted 110,000 basic cable subscribers, setting yet another quarterly record for the company.

Thanks to these gains, Comcast's fourth-quarter revenue jumped to $7.03 billion, up 30 percent from $5.42 billion in the year-earlier period. Likewise, its net income nearly tripled to $390 million, up from $133 million the year before.

Comcast officials said they expect to set new records again this year, projecting that they will add another 6.5 million RGUs. That total includes a projected pickup of 2.6 million VOIP subscribers.

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